Financial Instrument Institutions and Markets Essay

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Foreign Exchange

a) As the AUD is gaining value (buying power) and the EUR is losing value over time, June is in an excellent position with her European suppliers granting her a 60-day credit period and her Australian customers paying on 30-day credit terms: the AUD she receives in payment within 30 days will be worth more in EUR 30 days later, when her own payments are due, meaning she will save money.

b) One hedging strategy June could employ to shield against movements in either direction by either currency would simply be to shorten credit terms with suppliers and customers, paying as soon as bills were in and collecting as fast as possible, in a currency-swap type scenario.

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This has other business implications that would not necessarily be beneficial, however. June could also use forward contracts, locking in agreed-upon exchange rates for future purchases and sales over longer periods of times.

c) According to the basic theory of interest rate parity, appreciation in a currency will generally bear some relation to interest paid on investments in that currency, such that the interest earned in two different currencies ought to be equal as long as no external factor makes an arbitrage opportunity value available. That is, though the AUD is appreciating faster than the EUR, which might in fact be depreciating, an investment in AUD is not likely to earn more in true value (buying power) than….....

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"Financial Instrument Institutions And Markets" (2012, February 16) Retrieved May 13, 2025, from
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